scholarly journals The Quanto Theory of Exchange Rates

2019 ◽  
Vol 109 (3) ◽  
pp. 810-843 ◽  
Author(s):  
Lukas Kremens ◽  
Ian Martin
Keyword(s):  
Random Walk ◽  
Exchange Rates ◽  
Purchasing Power Parity ◽  
Uncovered Interest Parity ◽  
Power Parity ◽  
Panel Regressions ◽  
Out Of Sample ◽  
Covariance Term ◽  
Interest Parity ◽  
Forecast Variable

We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation. (JEL C53, E43, F31, F37, G12, G15)

Purchasing power parity and uncovered interest parity: The Spanish case

1998 ◽  
Vol 4 (4) ◽  
pp. 335-348
Author(s):  
Francisco J. Ledesma ◽  
Manuel Navarro ◽  
Jorge V. Perez ◽  
Simón Sosvilla
Keyword(s):  
Purchasing Power Parity ◽  
Purchasing Power ◽  
Uncovered Interest Parity ◽  
Power Parity ◽  
Interest Parity

Google Trends and Structural Exchange Rate Models for Turkish Lira–US Dollar Exchange Rate

2018 ◽  
Vol 14 (2) ◽  
Author(s):  
Levent Bulut ◽  
Can Dogan
Keyword(s):  
Exchange Rate ◽  
Random Walk ◽  
Purchasing Power Parity ◽  
Google Trends ◽  
Power Parity ◽  
Dollar Exchange Rate ◽  
Out Of Sample ◽  
Us Dollar ◽  
Exchange Rate Models ◽  
Turkish Lira

Abstract In this paper, we use Google Trends data to proxy macro fundamentals that are related to two conventional structural determination of exchange rate models: purchasing power parity model and the monetary exchange rate determination model. We assess forecasting performance of Google Trends based models against random walk null on Turkish Lira–US Dollar exchange rate for the period of January 2004 to August 2015. We offer a three-step methodology for query selection for macro fundamentals in Turkey and the US. In out-of-sample forecasting, results show better performance against no-change random walk predictions for specifications both when we use Google Trends data as the only exchange rate predictor or augment it with exchange rate fundamentals. We also find that Google Trends data has limited predictive power when used in year-on-year growth rate format.

Monetary and Exchange Rate Policies for International Financial Stability: A Proposal

1988 ◽  
Vol 2 (1) ◽  
pp. 83-103 ◽  
Author(s):  
Ronald I McKinnon
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Purchasing Power Parity ◽  
Financial Stability ◽  
Foreign Exchange Market ◽  
The United States ◽  
Power Parity ◽  
Monetary Reform ◽  
Exchange Rate Fluctuations

What keeps the three major industrial blocs -- Western Europe, North America, and industrialized Asia -- from developing a common monetary standard to prevent exchange-rate fluctuations? One important reason is the differing theoretical perspectives of economic advisers. The first issue is whether or not a floating foreign exchange market -- where governments do not systematically target exchange rates -- is “efficient.” Many economists believe that exchange risk can be effectively hedged in forward markets so international monetary reform is unnecessary. Second, after a decade and a half of unremitting turbulence in the foreign exchange markets, economists cannot agree on “equilibrium” or desirable official targets for exchange rates if they were to be stabilized. The contending principles of purchasing power parity and of balanced trade yield very different estimates for the “correct” yen/dollar and mark/dollar exchange rates. Third, if the three major blocs can agree to fix nominal exchange rates within narrow bands, by what working rule should the new monetary standard be anchored to prevent worldwide inflation or deflation? After considering the magnitude of exchange-rate fluctuations since floating began in the early 1970s, I analyze these conceptual issues in the course of demonstrating how the central banks of Japan, the United States, and Germany (representing the continental European bloc) can establish fixed exchange rates and international monetary stability.

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